If you have a sizable portfolio, you don't need an emergency fund

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absolute zero
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by absolute zero »

Spirit Rider wrote: Thu Oct 22, 2020 8:48 am
millennialmillions wrote: Thu Apr 09, 2020 10:22 am The exact definition of an emergency fund is a bit murky, but there are two generally agreed-upon traits:
  • Held in cash or highly liquid vehicle such as a checking account, saving account, or money market fund
  • Able to cover 6-12 months of expenses
Seeing as how you are using such a fundamentally flawed definition of funds necessary to cover various needs your entire voluminous diatribe is seriously flawed.
Wow strong statement.
Spirit Rider wrote: Thu Oct 22, 2020 8:48 am Anyone who thinks that funds needed over 6-12 months needs to be in checking, savings or money market funds is making a behavioral finance mistake.
Are you going to follow this up by specifying what alternate investment-vehicle or account an investor should be using for their emergency or "contingency" fund? As well as how the usage of this alternate account would invalidate the OP's entire analysis? You seemed like you were getting ready to take down his analysis, but then stopped short.
000
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by 000 »

absolute zero wrote: Thu Oct 22, 2020 9:18 pm
Spirit Rider wrote: Thu Oct 22, 2020 8:48 am Anyone who thinks that funds needed over 6-12 months needs to be in checking, savings or money market funds is making a behavioral finance mistake.
Are you going to follow this up by specifying what alternate investment-vehicle or account an investor should be using for their emergency or "contingency" fund? As well as how the usage of this alternate account would invalidate the OP's entire analysis? You seemed like you were getting ready to take down his analysis, but then stopped short.
I would like to know the answer to this too.
JBTX
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by JBTX »

millennialmillions wrote: Thu Apr 09, 2020 10:22 am There have been many recent topics explaining why everyone needs an emergency fund and why it should never be intermingled with other investments.

I disagree with that, and I did some analysis to show why. Many investors are better off without an emergency fund, instead investing all extra cash according to their typical asset allocation. Assuming a large enough portfolio, this strategy can mitigate the downside risk by selling investments to cover expenses in case of emergency. But the real differentiator is that it also maximizes the upside. By having more money invested, you will end up with a greater net worth over time.

Of course, this strategy is only viable if you have a portfolio that can take a hit and still cover your expenses in an emergency. If you haven’t yet reached that point, saving in a more traditional emergency fund is beneficial. But if you’ve started to accumulate some wealth, you’re better off without an emergency fund.

What is an emergency fund?

The general purpose of an emergency fund or a “rainy day fund” is to ensure you can cover expenses in an unexpected financial emergency, such as job loss or large medical bills. The exact definition of an emergency fund is a bit murky, but there are two generally agreed-upon traits:
  • Held in cash or highly liquid vehicle such as a checking account, saving account, or money market fund
  • Able to cover 6-12 months of expenses
Holding a traditional emergency fund like this is one way to mitigate financial downside, but it is not optimal. To determine what is optimal, we need to assess the ultimate goal of an emergency fund. Breaking it down, the goals are:
  1. Have enough cash in hand to cover immediate expenses
  2. Be able to withstand a period of up to a year with no income
The first goal should be met through the standard operating cash that you have available, without requiring an emergency fund. For example, I keep two months of expenses in my checking account for rent, food, etc. The second goal can then be accomplished with financial vehicles that can take a few days to get cash in hand. This opens many possible solutions, including cash under a mattress, gold buried in your backyard, money in a saving account, or a sizable investment portfolio.

Since all of these could meet the goals of an emergency fund, how can we choose which is optimal? We need another goal.

What an Emergency Fund Should Be – Mitigate Risk and Maximize Net Worth

The two previously mentioned goals of an emergency fund relate to reducing downside risk. But what about the upside? We shouldn’t mitigate risk without thinking about how it can impact our ability to accumulate more wealth. So, let’s add a third goal:
  1. Have enough cash in hand to cover immediate expenses
  2. Be able to withstand a period of up to a year with no income
  3. After the above two goals are met, maximize net worth over time
If your portfolio is large enough to withstand a significant drop and still cover a year’s expenses, these three goals are best met without a traditional emergency fund. The first goal is met by your operating cash, the second by selling investments, and the third by adding as much money to your investment portfolio as possible.

This is intuitive: having more money invested and less in cash will come out ahead over time. But some argue that being forced to sell stocks at a low price after a market downturn will offset the higher average returns from the additional investment. To analyze that counterpoint, let’s look at history.

History Shows that No Emergency Fund Performs Better

We’ll analyze two investors over the period from 2000 through 2019, which includes two major market downturns. Both investors started with annual income of $65,000 and expenses of $40,000 that increased with inflation each year. Both kept sufficient operating expenses in a checking account to meet liquid cash need. One investor (EF) saved an additional year of expenses in an emergency fund, with returns that equal inflation. The other (no-EF) invested in a 100% equity portfolio of the Vanguard Total Stock Market Fund (VTSMX or VTI).

The two investors are compared across two scenarios: the worst-case scenario and the best-case scenario. In the worst-case scenario, both investors lost their jobs and had zero income in both 2002 and 2008. The EF investor covered expenses from his emergency fund, and the no-EF investor sold stocks to cover expenses. In the best-case scenario, both investors maintained their jobs throughout the 20-year period. Here is how they fared:

Image

In both scenarios, the No-EF investor comes out ahead. Surprisingly, the difference between the two investors is more pronounced in the worst-case scenario when they lose their jobs. In this case the No-EF investor ends up with a net worth $100,000 (6%) higher.

While it is true the No-EF investor is forced to sell stocks low, he also buys back in low, shortly after the crash. The EF investor, on the other hand, misses out on this buying opportunity because he spends the next year-and-a-half building back his emergency fund before buying more stock. This causes the EF investor to miss the significant market gains after the crashes.

Unsurprisingly, the No-EF investor also wins in the best-case scenario, though the net worth difference is less pronounced at only 3%.

Portfolio Size Needed to Forgo an Emergency Fund

Based on this analysis, it is clear that an investor with a large enough portfolio should forgo an emergency fund. The question, then, becomes: how large of a portfolio is “large enough”?

The portfolio needs to be able to cover a year’s expenses even after a sharp drop. The largest one-year decline of the S&P 500 was 43.3% in 1931. To be extra conservative, let’s assume that a market drop of 75% is possible. To withstand that drop, your available portfolio would need to be 4 times your annual expenses. For example, a portfolio of $200,000 could fall 75% and still cover $50,000 in expenses if sold. If the market drops more than 75%, you likely have bigger societal problems that wouldn’t be solved by any emergency fund.

This amount must be available for you to withdraw without penalty. This includes regular taxable investments and Roth IRA and 401k contributions (after 5 years), but it does not include traditional 401k contributions.

TLDR

If you have built a sizable portfolio, you don’t need a separate stash of cash as your emergency fund. Instead, you can invest all funds according to your asset allocation and sell in case of emergency. This strategy will effectively mitigate your financial downside while also maximizing your net worth over time. This is true in both a worst-case scenario when you lose your income and a best-case scenario when you retain it.

A better-formatted post with detailed calculations and Excel file is available here

Help me understand in the worst case scenario why the no EF scenario doesn't do any worse than EF from 2007-2008 with about a 40% drop?

Also, of course when the market goes up, it is gives higher returns to have more invested at downturns than not. But I don't think that necessarily means that is a better risk adjusted strategy.

Also you could have a substantial portion of your EF in ibonds as both your bond allocation and your EF as an alternative.
Last edited by JBTX on Thu Oct 22, 2020 10:57 pm, edited 1 time in total.
rockstar
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by rockstar »

I keep my emergency funds in my checking account. I don't have to sell investments to raise cash. This has kept me panic free. It's really about behavior more than anything else. My taxable account is large enough to more than pay off my home.

What the OP ignores is that in any given year there is volatility in the equity market. What if you needed to raise cash in March this year because you didn't have an emergency fund? That's a pretty recent event that should be fresh in everyone's memories.
absolute zero
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by absolute zero »

JBTX wrote: Thu Oct 22, 2020 10:53 pm
Help me understand in the worst case scenario why the no EF scenario doesn't do any worse than EF from 2007-2008 with about a 40% drop?
If you go back and re-read the post that you quoted, he answers this question pretty clearly.
JBTX
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by JBTX »

absolute zero wrote: Thu Oct 22, 2020 11:06 pm
JBTX wrote: Thu Oct 22, 2020 10:53 pm
Help me understand in the worst case scenario why the no EF scenario doesn't do any worse than EF from 2007-2008 with about a 40% drop?
If you go back and re-read the post that you quoted, he answers this question pretty clearly.
I did. I'm not seeing it.
bck63
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by bck63 »

.....
JimmyJammy
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by JimmyJammy »

Didn’t Warren Buffet recommend, if he dies, putting 90% of his assets in something like VTI and 10% in short term treasuries?

So is that 10% his EF?
Spirit Rider
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by Spirit Rider »

000 wrote: Thu Oct 22, 2020 10:25 pm
absolute zero wrote: Thu Oct 22, 2020 9:18 pm
Spirit Rider wrote: Thu Oct 22, 2020 8:48 am Anyone who thinks that funds needed over 6-12 months needs to be in checking, savings or money market funds is making a behavioral finance mistake.
Are you going to follow this up by specifying what alternate investment-vehicle or account an investor should be using for their emergency or "contingency" fund? As well as how the usage of this alternate account would invalidate the OP's entire analysis? You seemed like you were getting ready to take down his analysis, but then stopped short.
I would like to know the answer to this too.
Nope. The OP fundamentally misunderstands that an emergency/contingency fund is an insurance fund. A low risk tiered contingency fund provides increased returns without the massive risk of the OP's plan. I have had to use contingency funds for two periods of > 12 months of unemployment. 2002 - 2003 and 2009 - 2010. Without having to sell a single equity at depressed prices.
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PicassoSparks
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by PicassoSparks »

Spirit Rider wrote: Fri Oct 23, 2020 7:06 am Nope. The OP fundamentally misunderstands that an emergency/contingency fund is an insurance fund. A low risk tiered contingency fund provides increased returns without the massive risk of the OP's plan. I have had to use contingency funds for two periods of > 12 months of unemployment. 2002 - 2003 and 2009 - 2010. Without having to sell a single equity at depressed prices.
The argument made is that the price you are paying for this insurance is TOO HIGH and that much like setting aside a little money every time a store tries to sell you an extended warranty instead of buying an overpriced insurance, you are better off investing the money because the net results will be better for you than if you hadn't foregone the asset increases when you didn't need the insurance.
KlangFool
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by KlangFool »

PicassoSparks wrote: Fri Oct 23, 2020 8:25 am
Spirit Rider wrote: Fri Oct 23, 2020 7:06 am Nope. The OP fundamentally misunderstands that an emergency/contingency fund is an insurance fund. A low risk tiered contingency fund provides increased returns without the massive risk of the OP's plan. I have had to use contingency funds for two periods of > 12 months of unemployment. 2002 - 2003 and 2009 - 2010. Without having to sell a single equity at depressed prices.
The argument made is that the price you are paying for this insurance is TOO HIGH and that much like setting aside a little money every time a store tries to sell you an extended warranty instead of buying an overpriced insurance, you are better off investing the money because the net results will be better for you than if you hadn't foregone the asset increases when you didn't need the insurance.
PicassoSparks,

A) And, usually, folks that make this kind of argument never faced a serious recession with no job security. After you went through one of those experiences, you want a big emergency fund.


What is the PRICE of being "Sleep Well At Night" (SWAN)?


On 1/1/2009, my employer laid off 50% of my co-workers at my location. 80% of my specific department was laid off. I was not laid off. But, I could be next at any time. the only reason why I could SWAN through that period is my 1-year emergency fund.


B) What is the price of taking a 30% pay cut because you panic and you need to take a job offer now or sell your stock at a big loss? Folks with the emergency fund can negotiate for a better offer. And, once you take a pay cut, it takes a long time or you may never recover.


C) It is stressful enough to be unemployed in a RECESSION. Do you really want the additional stress and pain of selling your stock at a big loss every month to feed your family? Unless and until you been through one of those experiences, how do you know that you can pay the PRICE?


I had been through too many RECESSIONS and ECONOMIC CRISES over 30+ years. I had seen too many folks that assume they would not panic. Then, they can no longer sleep.


Houston Oil Bust, Texas Saving & Loan Crisis, Asian Currency Crisis, Telecom Bust, 2008/2009 recession, and now 2020 recession.


KlangFool

P.S.: It is not SAFE to ASSUME that you would not panic in a situation that you have not experience.

[OT comment removed by admin LadyGeek]
Exchme
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by Exchme »

I tested my own portfolio with 149 years of historical data with the idea of 2 or 3 year savings that would be used for expenses and even rebalancing in "down" years and refilled in "up" years. Regardless of the algorithm for use and refilling, I kept finding that a 2-3 year EF has some benefit in the worst case at the cost of reducing the returns for the best case up to about 25 years. After that, the drag on the portfolio of keeping that much cash meant that even in the worst case return environment, just putting it all into stocks was better for the best, worst and average case. Obviously there are lots of variables, so YMMV, but it seemed to make sense.
SnowBog
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by SnowBog »

KlangFool wrote: Fri Oct 23, 2020 8:52 am
PicassoSparks wrote: Fri Oct 23, 2020 8:25 am
Spirit Rider wrote: Fri Oct 23, 2020 7:06 am Nope. The OP fundamentally misunderstands that an emergency/contingency fund is an insurance fund. A low risk tiered contingency fund provides increased returns without the massive risk of the OP's plan. I have had to use contingency funds for two periods of > 12 months of unemployment. 2002 - 2003 and 2009 - 2010. Without having to sell a single equity at depressed prices.
The argument made is that the price you are paying for this insurance is TOO HIGH and that much like setting aside a little money every time a store tries to sell you an extended warranty instead of buying an overpriced insurance, you are better off investing the money because the net results will be better for you than if you hadn't foregone the asset increases when you didn't need the insurance.
PicassoSparks,

A) And, usually, folks that make this kind of argument never faced a serious recession with no job security. After you went through one of those experiences, you want a big emergency fund.


What is the PRICE of being "Sleep Well At Night" (SWAN)?


On 1/1/2009, my employer laid off 50% of my co-workers at my location. 80% of my specific department was laid off. I was not laid off. But, I could be next at any time. the only reason why I could SWAN through that period is my 1-year emergency fund.


B) What is the price of taking a 30% pay cut because you panic and you need to take a job offer now or sell your stock at a big loss? Folks with the emergency fund can negotiate for a better offer. And, once you take a pay cut, it takes a long time or you may never recover.


C) It is stressful enough to be unemployed in a RECESSION. Do you really want the additional stress and pain of selling your stock at a big loss every month to feed your family? Unless and until you been through one of those experiences, how do you know that you can pay the PRICE?


I had been through too many RECESSIONS and ECONOMIC CRISES over 30+ years. I had seen too many folks that assume they would not panic. Then, they can no longer sleep.


Houston Oil Bust, Texas Saving & Loan Crisis, Asian Currency Crisis, Telecom Bust, 2008/2009 recession, and now 2020 recession.


KlangFool

P.S.: It is not SAFE to ASSUME that you would not panic in a situation that you have not experience.


[OT comment removed by admin LadyGeek]
Well said!

I've owned my house for nearly 20 years, paid in thousands for insurance... I've owned cars for more years, paid in thousands for insurance... And I keep 6-12+ months of an emergency fund... I've never even used any of these...

On paper, it's very easy to argue that these aren't worth it. The "financial value" I've received is arguably $0, so it's easy to argue they aren't needed...

But the small upside by having a few extra dollars invested does not outweigh the "downside" protection. Especially when you realize that things like emergency funds/strategies aren't exclusively for when you are unemployed. They are for when the "sh*t really hits the fan" and you are unemployed during a major market meltdown, get in a car wreck totaling your car causing damage to others while also having medical issues as a result, your roof starts to leak, and your kids needs braces.

Ok a bit extreme...

But the point is I sleep very well at night knowing such a series of events won't have any impact on my investments. I accept that I might not have as large of a portfolio... But I know I'll make it through the rough spots. (Same reason I'm not 100% stocks.)

(If it's relevant, I'm well on my way to FI, and likely RE. I could easily "justify" going to 100% stocks w/o EF, and simply "working longer" if/as needed should we suffer a downturn and/or we have a series of events such that we would have needed an "emergency fund". But IMHO that is hubris. Look at the numerous threads about people finding themselves nearly forced out of the workforce in their 50's. It's simply unrealistic and arguably irresponsible to assume you'll be 100% employed for as long as YOU want to be...)
SnowBog
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by SnowBog »

JimmyJammy wrote: Fri Oct 23, 2020 5:51 am Didn’t Warren Buffet recommend, if he dies, putting 90% of his assets in something like VTI and 10% in short term treasuries?

So is that 10% his EF?
No idea if he includes his "cash" as part of his AA or not...

But I suspect that their dividends are likely more than enough to cover their expenses. I guess if that's your level of assets, then maybe it doesn't matter. But I'll likely never reach that level...
000
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by 000 »

Spirit Rider wrote: Fri Oct 23, 2020 7:06 am Nope. The OP fundamentally misunderstands that an emergency/contingency fund is an insurance fund. A low risk tiered contingency fund provides increased returns without the massive risk of the OP's plan. I have had to use contingency funds for two periods of > 12 months of unemployment. 2002 - 2003 and 2009 - 2010. Without having to sell a single equity at depressed prices.
It's not at all clear to me what you're getting at here. Are you saying hold bonds in the portfolio instead of cash in an EF?
Spirit Rider
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by Spirit Rider »

I'm saying when you start talking about longer term contingency funds it is not all or nothing (cash/cash equivalents or equities).

You can tier your funds into no risk principle protected, minimal risk short-term duration matched bonds and maybe even a 20:80 fund. The latter has been shown to have lower volatility than longer-term bonds or the massive risk of equities.
000
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by 000 »

Spirit Rider wrote: Fri Oct 23, 2020 5:24 pm I'm saying when you start talking about longer term contingency funds it is not all or nothing (cash/cash equivalents or equities).

You can tier your funds into no risk principle protected, minimal risk short-term duration matched bonds and maybe even a 20:80 fund. The latter has been shown to have lower volatility than longer-term bonds or the massive risk of equities.
Ok, but short-term "high quality" duration matched bonds are yielding about what cash yields now, or less. So it's not clear how that would meaningfully improve returns.
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by Spirit Rider »

Do not confuse current events for long term results. The returns that matter are not those short-term during a financial crisis that necessitates their lower risk, but rather the longer term higher returns than solely cash and cash equivalents.
000
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by 000 »

Spirit Rider wrote: Fri Oct 23, 2020 5:32 pm Do not confuse current events for long term results. The returns that matter are not those short-term during a financial crisis that necessitates their lower risk, but rather the longer term higher returns than solely cash and cash equivalents.
FDIC Insured Savings account: 0.60%+ APY
Vanguard Short Term Treasury Index Fund: 0.08% SEC yield

Why would anyone put part of their emergency fund in the Treasury fund right now?
fingoals
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by fingoals »

000 wrote: Fri Oct 23, 2020 5:39 pm
Spirit Rider wrote: Fri Oct 23, 2020 5:32 pm Do not confuse current events for long term results. The returns that matter are not those short-term during a financial crisis that necessitates their lower risk, but rather the longer term higher returns than solely cash and cash equivalents.
FDIC Insured Savings account: 0.60%+ APY
Vanguard Short Term Treasury Index Fund: 0.08% SEC yield

Why would anyone put part of their emergency fund in the Treasury fund right now?
Current APY for VBTLX (1.17%) is practically twice of the savings account's APY you cited above. Unless one insists on having FDIC insurance and cannot tolerate a potential slight loss of principal (to the tune of several % tops - which, by the way, is partially offset by higher APY), why would they prefer using a high-yield savings account? I understand that the Total Bond Fund's APY is variable and, unlike in the HYSA case, is not guaranteed, but still ...
ivgrivchuck
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by ivgrivchuck »

fingoals wrote: Sat Oct 24, 2020 12:48 pm
000 wrote: Fri Oct 23, 2020 5:39 pm
Spirit Rider wrote: Fri Oct 23, 2020 5:32 pm Do not confuse current events for long term results. The returns that matter are not those short-term during a financial crisis that necessitates their lower risk, but rather the longer term higher returns than solely cash and cash equivalents.
FDIC Insured Savings account: 0.60%+ APY
Vanguard Short Term Treasury Index Fund: 0.08% SEC yield

Why would anyone put part of their emergency fund in the Treasury fund right now?
Current APY for VBTLX (1.17%) is practically twice of the savings account's APY you cited above. Unless one insists on having FDIC insurance and cannot tolerate a potential slight loss of principal (to the tune of several % tops - which, by the way, is partially offset by higher APY), why would they prefer using a high-yield savings account? I understand that the Total Bond Fund's APY is variable and, unlike in the HYSA case, is not guaranteed, but still ...
The reason is simple:
1) VBTLX has significantly more risk, especially in some low probability quickly rising interest rate scenarios.
2) You can have a similar expected rate of return with lower risk, by investing 90% of your emergency fund in HYSA and 10% in VTI.
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
fingoals
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by fingoals »

ivgrivchuck wrote: Sat Oct 24, 2020 1:04 pm
fingoals wrote: Sat Oct 24, 2020 12:48 pm
000 wrote: Fri Oct 23, 2020 5:39 pm
Spirit Rider wrote: Fri Oct 23, 2020 5:32 pm Do not confuse current events for long term results. The returns that matter are not those short-term during a financial crisis that necessitates their lower risk, but rather the longer term higher returns than solely cash and cash equivalents.
FDIC Insured Savings account: 0.60%+ APY
Vanguard Short Term Treasury Index Fund: 0.08% SEC yield

Why would anyone put part of their emergency fund in the Treasury fund right now?
Current APY for VBTLX (1.17%) is practically twice of the savings account's APY you cited above. Unless one insists on having FDIC insurance and cannot tolerate a potential slight loss of principal (to the tune of several % tops - which, by the way, is partially offset by higher APY), why would they prefer using a high-yield savings account? I understand that the Total Bond Fund's APY is variable and, unlike in the HYSA case, is not guaranteed, but still ...
The reason is simple:
1) VBTLX has significantly more risk, especially in some low probability quickly rising interest rate scenarios.
2) You can have a similar expected rate of return with lower risk, by investing 90% of your emergency fund in HYSA and 10% in VTI.
I see. Thank you for sharing your thoughts. Where do you see money market accounts (e.g., VMMXX) on the risk scale between these two options then?
ivgrivchuck
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by ivgrivchuck »

fingoals wrote: Sat Oct 24, 2020 1:26 pm
I see. Thank you for sharing your thoughts. Where do you see money market accounts (e.g., VMMXX) on the risk scale between these two options then?
VMMXX invests in short-term goverment bonds. No duration risk or credit risk. In my mind it is roughly the same as FDIC insured account. Of course the current yield is zero, so loses clearly to HYSA/I-bonds
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
fingoals
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by fingoals »

ivgrivchuck wrote: Sat Oct 24, 2020 1:34 pm
fingoals wrote: Sat Oct 24, 2020 1:26 pm
I see. Thank you for sharing your thoughts. Where do you see money market accounts (e.g., VMMXX) on the risk scale between these two options then?
VMMXX invests in short-term goverment bonds. No duration risk or credit risk. In my mind it is roughly the same as FDIC insured account. Of course the current yield is zero, so loses clearly to HYSA/I-bonds
Understood. Your clarifications are much appreciated.
000
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by 000 »

fingoals wrote: Sat Oct 24, 2020 12:48 pm
000 wrote: Fri Oct 23, 2020 5:39 pm
Spirit Rider wrote: Fri Oct 23, 2020 5:32 pm Do not confuse current events for long term results. The returns that matter are not those short-term during a financial crisis that necessitates their lower risk, but rather the longer term higher returns than solely cash and cash equivalents.
FDIC Insured Savings account: 0.60%+ APY
Vanguard Short Term Treasury Index Fund: 0.08% SEC yield

Why would anyone put part of their emergency fund in the Treasury fund right now?
Current APY for VBTLX (1.17%) is practically twice of the savings account's APY you cited above. Unless one insists on having FDIC insurance and cannot tolerate a potential slight loss of principal (to the tune of several % tops - which, by the way, is partially offset by higher APY), why would they prefer using a high-yield savings account? I understand that the Total Bond Fund's APY is variable and, unlike in the HYSA case, is not guaranteed, but still ...
Spirit Rider said "You can tier your funds into no risk principle protected, minimal risk short-term duration matched bonds". VBTLX is an intermediate term bond fund that has both treasuries and corporates, so I don't think he was referring to VBTLX; of course, I still don't know what he was referring to because he never clarified what ST bonds are preferable to HYSA right now.
fingoals
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by fingoals »

000 wrote: Sat Oct 24, 2020 5:26 pm
fingoals wrote: Sat Oct 24, 2020 12:48 pm
000 wrote: Fri Oct 23, 2020 5:39 pm
Spirit Rider wrote: Fri Oct 23, 2020 5:32 pm Do not confuse current events for long term results. The returns that matter are not those short-term during a financial crisis that necessitates their lower risk, but rather the longer term higher returns than solely cash and cash equivalents.
FDIC Insured Savings account: 0.60%+ APY
Vanguard Short Term Treasury Index Fund: 0.08% SEC yield

Why would anyone put part of their emergency fund in the Treasury fund right now?
Current APY for VBTLX (1.17%) is practically twice of the savings account's APY you cited above. Unless one insists on having FDIC insurance and cannot tolerate a potential slight loss of principal (to the tune of several % tops - which, by the way, is partially offset by higher APY), why would they prefer using a high-yield savings account? I understand that the Total Bond Fund's APY is variable and, unlike in the HYSA case, is not guaranteed, but still ...
Spirit Rider said "You can tier your funds into no risk principle protected, minimal risk short-term duration matched bonds". VBTLX is an intermediate term bond fund that has both treasuries and corporates, so I don't think he was referring to VBTLX; of course, I still don't know what he was referring to because he never clarified what ST bonds are preferable to HYSA right now.
Thank you for chiming in. I think that two comments by @ivgrivchuck above answer my question pretty well and hope that you agree.
000
Posts: 4070
Joined: Thu Jul 23, 2020 12:04 am
Location: Ursa Minor

Re: If you have a sizable portfolio, you don't need an emergency fund

Post by 000 »

fingoals wrote: Sat Oct 24, 2020 6:23 pm Thank you for chiming in. I think that two comments by @ivgrivchuck above answer my question pretty well and hope that you agree.
Yes, I was just clarifying why I chose Short Term Treasury Index for the comparison.
nigel_ht
Posts: 1579
Joined: Tue Jan 01, 2019 10:14 am

Re: If you have a sizable portfolio, you don't need an emergency fund

Post by nigel_ht »

KlangFool wrote: Fri Oct 23, 2020 8:52 am
PicassoSparks wrote: Fri Oct 23, 2020 8:25 am The argument made is that the price you are paying for this insurance is TOO HIGH and that much like setting aside a little money every time a store tries to sell you an extended warranty instead of buying an overpriced insurance, you are better off investing the money because the net results will be better for you than if you hadn't foregone the asset increases when you didn't need the insurance.
PicassoSparks,

A) And, usually, folks that make this kind of argument never faced a serious recession with no job security. After you went through one of those experiences, you want a big emergency fund.
You do this a lot.

You aren't the only one that has ever faced hardship, financial disasters, recessions, job loss, etc. You bring this up as a tump card and it's simply tiring.
On 1/1/2009, my employer laid off 50% of my co-workers at my location. 80% of my specific department was laid off. I was not laid off. But, I could be next at any time. the only reason why I could SWAN through that period is my 1-year emergency fund.
So what? I don't think I had even a 1 year EF when that happened to me.
B) What is the price of taking a 30% pay cut because you panic and you need to take a job offer now or sell your stock at a big loss? Folks with the emergency fund can negotiate for a better offer. And, once you take a pay cut, it takes a long time or you may never recover.
Folks with a higher net worth can afford to wait longer for a better job offer. Sometimes 100/0 results in a better outcome because you have more net worth. Sometimes 70/30 is better.

Sometimes taking a 30% pay cut isn't a panic move but a reasoned one.
C) It is stressful enough to be unemployed in a RECESSION. Do you really want the additional stress and pain of selling your stock at a big loss every month to feed your family? Unless and until you been through one of those experiences, how do you know that you can pay the PRICE?
Whatever man. You pay the price because you have to.

Also it's not a "big loss" if you bought the stock at $1 and you have to sell at $1.50 even if the stock hit $10 at some point in the past when sitting as cash it is worth $0.97 due to inflation
I had been through too many RECESSIONS and ECONOMIC CRISES over 30+ years. I had seen too many folks that assume they would not panic. Then, they can no longer sleep.
Yah, yah. Been through the same 30+ years as you buddy. Excuse me for not kowtowing when you say this or go on about how your family a thousand years of experience blah blah.

I have the moderately unique experience of being the child of someone born in a Japanese American internment camp and parents that survived the fall of Manila and Nanjing...that's amusingly strange.

One of my dads told me we're always only one executive order away from losing everything. How when the family went in they had a big house and money and when they came out they had to refurbish a chicken coop to live in (the industrial kind, not the little ones). This has fueled his personality and financial strategy his entire life. He's made and lost multiple fortunes...the money didn't really matter because it could be easily taken away so his life has been 100% all in baby. Is this the correct viewpoint? It worked out pretty well so I guess so.

And yet the responses to the same experience are as varied as the individual and even in the same family can be widely different. Among my aunts and uncles some of their opinions on the internment are diametrically opposite. Same family. Same upbringing. Same environment. Different lessons learned.

My other father taught me a different way. Tortoise beats the hare. Build your financial house steadily the BH way...that's worked out even better. He spent his time in the war escaping from the Japanese. His lesson to me was a big part of survival was luck and friends. Which plane you got on. Which city you went to. The right choice wasn't always obvious and the outcome can be dire. So just do the best you can and with more friends the more opportunity for luck.

One learned that the path through financial adversity was to optimize offense and make more. The other optimized the defense game and saved more.

So your assertion that your viewpoint is correct simply because you've lived through stuff isn't compelling at all. What if YOU learned the wrong lessons from your experiences? Or even if not wrong, not the only correct lesson?

So enough with the "I lived through blah blah so you don't know what I know" hand wavy nonsense. Your life experiences don't stack up to be anything special to me.

Sometimes 100/0 provides lower total risk than 70/30. Sometimes holding 30% in reserve is better. It isn't one size fits all scenarios and understanding which works better in which scenarios is valuable. Then folks can make an informed decision as to which strategy is better for them.
LaborDoc
Posts: 23
Joined: Sun Dec 08, 2019 11:14 am

Re: If you have a sizable portfolio, you don't need an emergency fund

Post by LaborDoc »

nigel_ht wrote: Sat Oct 24, 2020 7:41 pm
KlangFool wrote: Fri Oct 23, 2020 8:52 am
PicassoSparks wrote: Fri Oct 23, 2020 8:25 am The argument made is that the price you are paying for this insurance is TOO HIGH and that much like setting aside a little money every time a store tries to sell you an extended warranty instead of buying an overpriced insurance, you are better off investing the money because the net results will be better for you than if you hadn't foregone the asset increases when you didn't need the insurance.
PicassoSparks,

A) And, usually, folks that make this kind of argument never faced a serious recession with no job security. After you went through one of those experiences, you want a big emergency fund.
You do this a lot.

You aren't the only one that has ever faced hardship, financial disasters, recessions, job loss, etc. You bring this up as a tump card and it's simply tiring.
On 1/1/2009, my employer laid off 50% of my co-workers at my location. 80% of my specific department was laid off. I was not laid off. But, I could be next at any time. the only reason why I could SWAN through that period is my 1-year emergency fund.
So what? I don't think I had even a 1 year EF when that happened to me.
B) What is the price of taking a 30% pay cut because you panic and you need to take a job offer now or sell your stock at a big loss? Folks with the emergency fund can negotiate for a better offer. And, once you take a pay cut, it takes a long time or you may never recover.
Folks with a higher net worth can afford to wait longer for a better job offer. Sometimes 100/0 results in a better outcome because you have more net worth. Sometimes 70/30 is better.

Sometimes taking a 30% pay cut isn't a panic move but a reasoned one.
C) It is stressful enough to be unemployed in a RECESSION. Do you really want the additional stress and pain of selling your stock at a big loss every month to feed your family? Unless and until you been through one of those experiences, how do you know that you can pay the PRICE?
Whatever man. You pay the price because you have to.

Also it's not a "big loss" if you bought the stock at $1 and you have to sell at $1.50 even if the stock hit $10 at some point in the past when sitting as cash it is worth $0.97 due to inflation
I had been through too many RECESSIONS and ECONOMIC CRISES over 30+ years. I had seen too many folks that assume they would not panic. Then, they can no longer sleep.
Yah, yah. Been through the same 30+ years as you buddy. Excuse me for not kowtowing when you say this or go on about how your family a thousand years of experience blah blah.

I have the moderately unique experience of being the child of someone born in a Japanese American internment camp and parents that survived the fall of Manila and Nanjing...that's amusingly strange.

One of my dads told me we're always only one executive order away from losing everything. How when the family went in they had a big house and money and when they came out they had to refurbish a chicken coop to live in (the industrial kind, not the little ones). This has fueled his personality and financial strategy his entire life. He's made and lost multiple fortunes...the money didn't really matter because it could be easily taken away so his life has been 100% all in baby. Is this the correct viewpoint? It worked out pretty well so I guess so.

And yet the responses to the same experience are as varied as the individual and even in the same family can be widely different. Among my aunts and uncles some of their opinions on the internment are diametrically opposite. Same family. Same upbringing. Same environment. Different lessons learned.

My other father taught me a different way. Tortoise beats the hare. Build your financial house steadily the BH way...that's worked out even better. He spent his time in the war escaping from the Japanese. His lesson to me was a big part of survival was luck and friends. Which plane you got on. Which city you went to. The right choice wasn't always obvious and the outcome can be dire. So just do the best you can and with more friends the more opportunity for luck.

One learned that the path through financial adversity was to optimize offense and make more. The other optimized the defense game and saved more.

So your assertion that your viewpoint is correct simply because you've lived through stuff isn't compelling at all. What if YOU learned the wrong lessons from your experiences? Or even if not wrong, not the only correct lesson?

So enough with the "I lived through blah blah so you don't know what I know" hand wavy nonsense. Your life experiences don't stack up to be anything special to me.

Sometimes 100/0 provides lower total risk than 70/30. Sometimes holding 30% in reserve is better. It isn't one size fits all scenarios and understanding which works better in which scenarios is valuable. Then folks can make an informed decision as to which strategy is better for them.
I just became a huge fan of nigel_ht

To sum him/her up... personal finance is personal
SnowBog
Posts: 703
Joined: Fri Dec 21, 2018 11:21 pm

Re: If you have a sizable portfolio, you don't need an emergency fund

Post by SnowBog »

LaborDoc wrote: Sat Oct 24, 2020 8:46 pm
nigel_ht wrote: Sat Oct 24, 2020 7:41 pm
KlangFool wrote: Fri Oct 23, 2020 8:52 am
PicassoSparks wrote: Fri Oct 23, 2020 8:25 am The argument made is that the price you are paying for this insurance is TOO HIGH and that much like setting aside a little money every time a store tries to sell you an extended warranty instead of buying an overpriced insurance, you are better off investing the money because the net results will be better for you than if you hadn't foregone the asset increases when you didn't need the insurance.
PicassoSparks,

A) And, usually, folks that make this kind of argument never faced a serious recession with no job security. After you went through one of those experiences, you want a big emergency fund.
You do this a lot.

You aren't the only one that has ever faced hardship, financial disasters, recessions, job loss, etc. You bring this up as a tump card and it's simply tiring.
On 1/1/2009, my employer laid off 50% of my co-workers at my location. 80% of my specific department was laid off. I was not laid off. But, I could be next at any time. the only reason why I could SWAN through that period is my 1-year emergency fund.
So what? I don't think I had even a 1 year EF when that happened to me.
B) What is the price of taking a 30% pay cut because you panic and you need to take a job offer now or sell your stock at a big loss? Folks with the emergency fund can negotiate for a better offer. And, once you take a pay cut, it takes a long time or you may never recover.
Folks with a higher net worth can afford to wait longer for a better job offer. Sometimes 100/0 results in a better outcome because you have more net worth. Sometimes 70/30 is better.

Sometimes taking a 30% pay cut isn't a panic move but a reasoned one.
C) It is stressful enough to be unemployed in a RECESSION. Do you really want the additional stress and pain of selling your stock at a big loss every month to feed your family? Unless and until you been through one of those experiences, how do you know that you can pay the PRICE?
Whatever man. You pay the price because you have to.

Also it's not a "big loss" if you bought the stock at $1 and you have to sell at $1.50 even if the stock hit $10 at some point in the past when sitting as cash it is worth $0.97 due to inflation
I had been through too many RECESSIONS and ECONOMIC CRISES over 30+ years. I had seen too many folks that assume they would not panic. Then, they can no longer sleep.
Yah, yah. Been through the same 30+ years as you buddy. Excuse me for not kowtowing when you say this or go on about how your family a thousand years of experience blah blah.

I have the moderately unique experience of being the child of someone born in a Japanese American internment camp and parents that survived the fall of Manila and Nanjing...that's amusingly strange.

One of my dads told me we're always only one executive order away from losing everything. How when the family went in they had a big house and money and when they came out they had to refurbish a chicken coop to live in (the industrial kind, not the little ones). This has fueled his personality and financial strategy his entire life. He's made and lost multiple fortunes...the money didn't really matter because it could be easily taken away so his life has been 100% all in baby. Is this the correct viewpoint? It worked out pretty well so I guess so.

And yet the responses to the same experience are as varied as the individual and even in the same family can be widely different. Among my aunts and uncles some of their opinions on the internment are diametrically opposite. Same family. Same upbringing. Same environment. Different lessons learned.

My other father taught me a different way. Tortoise beats the hare. Build your financial house steadily the BH way...that's worked out even better. He spent his time in the war escaping from the Japanese. His lesson to me was a big part of survival was luck and friends. Which plane you got on. Which city you went to. The right choice wasn't always obvious and the outcome can be dire. So just do the best you can and with more friends the more opportunity for luck.

One learned that the path through financial adversity was to optimize offense and make more. The other optimized the defense game and saved more.

So your assertion that your viewpoint is correct simply because you've lived through stuff isn't compelling at all. What if YOU learned the wrong lessons from your experiences? Or even if not wrong, not the only correct lesson?

So enough with the "I lived through blah blah so you don't know what I know" hand wavy nonsense. Your life experiences don't stack up to be anything special to me.

Sometimes 100/0 provides lower total risk than 70/30. Sometimes holding 30% in reserve is better. It isn't one size fits all scenarios and understanding which works better in which scenarios is valuable. Then folks can make an informed decision as to which strategy is better for them.
I just became a huge fan of nigel_ht

To sum him/her up... personal finance is personal
Personal finance is personal, no argument there.

But ultimately, I welcome someone like KlangFool who has a clear interest in trying to help others, shares their personal story giving context to their views, and invests the time to explain things when asked. In my view, that's not a bad thing...

As I understand it, way too many people live paycheck to paycheck, and assume the next one will always come...

New investors who argue for 100/0 rarely understand how "they'll" react when they see their balances crater.

And I forget the exact quote (and who said it), but it was eye opening for me to hear the biggest risk to most investors is themselves (and the irrational decisions they may make).

So I have no problems with people providing a "cautionary tale" to highlight life doesn't also work out according to "your plan". For those that already know this, they can ignore it. For those that don't, I'd rather they hear it now before they suffer from not having known. Isn't that the point?

But as you noted, personal finance is personal, people are ultimately responsible for making their own choices...
JoeJohnson
Posts: 443
Joined: Wed Jun 08, 2011 2:34 pm

Re: If you have a sizable portfolio, you don't need an emergency fund

Post by JoeJohnson »

Color me shocked that an analysis shows investing in stocks outpaces cash. Sarcasm on my part. This analysis is obvious over time if the stock market continues to produce returns in excess of cash
bling
Posts: 761
Joined: Sat Jan 21, 2012 12:49 pm

Re: If you have a sizable portfolio, you don't need an emergency fund

Post by bling »

SnowBog wrote: Sat Oct 24, 2020 11:21 pm Personal finance is personal, no argument there.

But ultimately, I welcome someone like KlangFool who has a clear interest in trying to help others, shares their personal story giving context to their views, and invests the time to explain things when asked. In my view, that's not a bad thing...

As I understand it, way too many people live paycheck to paycheck, and assume the next one will always come...

New investors who argue for 100/0 rarely understand how "they'll" react when they see their balances crater.

And I forget the exact quote (and who said it), but it was eye opening for me to hear the biggest risk to most investors is themselves (and the irrational decisions they may make).

So I have no problems with people providing a "cautionary tale" to highlight life doesn't also work out according to "your plan". For those that already know this, they can ignore it. For those that don't, I'd rather they hear it now before they suffer from not having known. Isn't that the point?

But as you noted, personal finance is personal, people are ultimately responsible for making their own choices...
the typical BH does not live paycheck to paycheck. they save at least 20% of their income. many save 50% here. with that rate of contribution, it doesn't matter if you're 100% stocks, 100% bonds, EF, or no EF, you will be fine.

i personally don't believe in emergency funds, and i have not had one ever. if you want to sleep well at night increase your bond allocation.
JustinR
Posts: 1396
Joined: Tue Apr 27, 2010 11:43 pm

Re: If you have a sizable portfolio, you don't need an emergency fund

Post by JustinR »

So to summarize the premise of this thread:

"Even if you're forced to sell low to cover expenses, you'll still come out ahead compared to having held that amount in cash."

Does that sound right?
kimura king
Posts: 160
Joined: Tue Dec 31, 2019 4:59 pm

Re: If you have a sizable portfolio, you don't need an emergency fund

Post by kimura king »

rockstar wrote: Thu Oct 22, 2020 10:56 pm I keep my emergency funds in my checking account. I don't have to sell investments to raise cash. This has kept me panic free. It's really about behavior more than anything else. My taxable account is large enough to more than pay off my home.
this is what winning looks like
bling
Posts: 761
Joined: Sat Jan 21, 2012 12:49 pm

Re: If you have a sizable portfolio, you don't need an emergency fund

Post by bling »

kimura king wrote: Sun Oct 25, 2020 9:00 am
rockstar wrote: Thu Oct 22, 2020 10:56 pm I keep my emergency funds in my checking account. I don't have to sell investments to raise cash. This has kept me panic free. It's really about behavior more than anything else. My taxable account is large enough to more than pay off my home.
this is what winning looks like
at the low low price of 6-7% expected CAGR every year.

more power to you if you need something like this to stay the course but let's not ignore the real costs of doing so.
User avatar
mmmodem
Posts: 2333
Joined: Thu May 20, 2010 1:22 pm

Re: If you have a sizable portfolio, you don't need an emergency fund

Post by mmmodem »

Thanks for this, OP. I came to the conclusion that an EF was no longer part of my emergency plan earlier this year when my taxable investments were 4x expenses. It's reassuring to have independent data to confirm my decision. I don't look at my EF as insurance. If that is fundamently flawed, so be it.

February also turned out to be a terrible time to empty my EF and buy into my AA. I didn't panic sell when stocks dropped in March or when my employer announced layoffs over the summer. I don't assume that I won't panic sell on the next recession. As others have already stated, this is personal finance. I sleep well at night as a no EF investor.
stoptothink
Posts: 8696
Joined: Fri Dec 31, 2010 9:53 am

Re: If you have a sizable portfolio, you don't need an emergency fund

Post by stoptothink »

LaborDoc wrote: Sat Oct 24, 2020 8:46 pm
nigel_ht wrote: Sat Oct 24, 2020 7:41 pm
KlangFool wrote: Fri Oct 23, 2020 8:52 am
PicassoSparks wrote: Fri Oct 23, 2020 8:25 am The argument made is that the price you are paying for this insurance is TOO HIGH and that much like setting aside a little money every time a store tries to sell you an extended warranty instead of buying an overpriced insurance, you are better off investing the money because the net results will be better for you than if you hadn't foregone the asset increases when you didn't need the insurance.
PicassoSparks,

A) And, usually, folks that make this kind of argument never faced a serious recession with no job security. After you went through one of those experiences, you want a big emergency fund.
You do this a lot.

You aren't the only one that has ever faced hardship, financial disasters, recessions, job loss, etc. You bring this up as a tump card and it's simply tiring.
On 1/1/2009, my employer laid off 50% of my co-workers at my location. 80% of my specific department was laid off. I was not laid off. But, I could be next at any time. the only reason why I could SWAN through that period is my 1-year emergency fund.
So what? I don't think I had even a 1 year EF when that happened to me.
B) What is the price of taking a 30% pay cut because you panic and you need to take a job offer now or sell your stock at a big loss? Folks with the emergency fund can negotiate for a better offer. And, once you take a pay cut, it takes a long time or you may never recover.
Folks with a higher net worth can afford to wait longer for a better job offer. Sometimes 100/0 results in a better outcome because you have more net worth. Sometimes 70/30 is better.

Sometimes taking a 30% pay cut isn't a panic move but a reasoned one.
C) It is stressful enough to be unemployed in a RECESSION. Do you really want the additional stress and pain of selling your stock at a big loss every month to feed your family? Unless and until you been through one of those experiences, how do you know that you can pay the PRICE?
Whatever man. You pay the price because you have to.

Also it's not a "big loss" if you bought the stock at $1 and you have to sell at $1.50 even if the stock hit $10 at some point in the past when sitting as cash it is worth $0.97 due to inflation
I had been through too many RECESSIONS and ECONOMIC CRISES over 30+ years. I had seen too many folks that assume they would not panic. Then, they can no longer sleep.
Yah, yah. Been through the same 30+ years as you buddy. Excuse me for not kowtowing when you say this or go on about how your family a thousand years of experience blah blah.

I have the moderately unique experience of being the child of someone born in a Japanese American internment camp and parents that survived the fall of Manila and Nanjing...that's amusingly strange.

One of my dads told me we're always only one executive order away from losing everything. How when the family went in they had a big house and money and when they came out they had to refurbish a chicken coop to live in (the industrial kind, not the little ones). This has fueled his personality and financial strategy his entire life. He's made and lost multiple fortunes...the money didn't really matter because it could be easily taken away so his life has been 100% all in baby. Is this the correct viewpoint? It worked out pretty well so I guess so.

And yet the responses to the same experience are as varied as the individual and even in the same family can be widely different. Among my aunts and uncles some of their opinions on the internment are diametrically opposite. Same family. Same upbringing. Same environment. Different lessons learned.

My other father taught me a different way. Tortoise beats the hare. Build your financial house steadily the BH way...that's worked out even better. He spent his time in the war escaping from the Japanese. His lesson to me was a big part of survival was luck and friends. Which plane you got on. Which city you went to. The right choice wasn't always obvious and the outcome can be dire. So just do the best you can and with more friends the more opportunity for luck.

One learned that the path through financial adversity was to optimize offense and make more. The other optimized the defense game and saved more.

So your assertion that your viewpoint is correct simply because you've lived through stuff isn't compelling at all. What if YOU learned the wrong lessons from your experiences? Or even if not wrong, not the only correct lesson?

So enough with the "I lived through blah blah so you don't know what I know" hand wavy nonsense. Your life experiences don't stack up to be anything special to me.

Sometimes 100/0 provides lower total risk than 70/30. Sometimes holding 30% in reserve is better. It isn't one size fits all scenarios and understanding which works better in which scenarios is valuable. Then folks can make an informed decision as to which strategy is better for them.
I just became a huge fan of nigel_ht

To sum him/her up... personal finance is personal
I actually tend to agree with Klangfool on a lot of things as I am similarly very cautious financially, but his refusal to accept that his "rules" may be irrelevant for the situations of others gets old.
SnowBog
Posts: 703
Joined: Fri Dec 21, 2018 11:21 pm

Re: If you have a sizable portfolio, you don't need an emergency fund

Post by SnowBog »

bling wrote: Sun Oct 25, 2020 8:03 am
SnowBog wrote: Sat Oct 24, 2020 11:21 pm Personal finance is personal, no argument there.

But ultimately, I welcome someone like KlangFool who has a clear interest in trying to help others, shares their personal story giving context to their views, and invests the time to explain things when asked. In my view, that's not a bad thing...

As I understand it, way too many people live paycheck to paycheck, and assume the next one will always come...

New investors who argue for 100/0 rarely understand how "they'll" react when they see their balances crater.

And I forget the exact quote (and who said it), but it was eye opening for me to hear the biggest risk to most investors is themselves (and the irrational decisions they may make).

So I have no problems with people providing a "cautionary tale" to highlight life doesn't also work out according to "your plan". For those that already know this, they can ignore it. For those that don't, I'd rather they hear it now before they suffer from not having known. Isn't that the point?

But as you noted, personal finance is personal, people are ultimately responsible for making their own choices...
the typical BH does not live paycheck to paycheck. they save at least 20% of their income. many save 50% here. with that rate of contribution, it doesn't matter if you're 100% stocks, 100% bonds, EF, or no EF, you will be fine.

i personally don't believe in emergency funds, and i have not had one ever. if you want to sleep well at night increase your bond allocation.
Long time BH, sure - but there are lots of new members where that simply doesn't apply.

I'll use myself as an example. Before I found BH and started to get a handle on finances...

I've maxed out my 401k for nearly as long as I've had access to one, but our income vastly surpassed my 401k contributions, and we never thought to start my spouses tax-deferred contributions, so I was likely saving far less than 10% of my income.

I was 100% stocks. Not by choice, but by ignorance. I just selected the fund options with the best reviews. And we had an obscene amount of concentration in employer stocks...

I didn't know about Backdoor Roths, Mega Backdoor Roth, the role of bonds, SWR, retirement planning, or many other topics.

I had no real emergency fund/plan/strategy. I did have a decent savings account, so I wasn't quite "paycheck to paycheck". But often times our spending was out of control, so there were several times I had to drain our savings to cover expenses. Had we had a "real emergency", especially if that was tied to me being unemployed, it could have been very bad for us...

I credit this wonderful community for taking me from a financial idiot to (hopefully at least) financially literate. I appreciate the "old guard" like KlangFool, who provide an historical and personal perspective I can learn from. And I appreciate the "new ideas" of people looking to push the envelope and come up with new approaches. I think the balance of both provides something far better than an echo chamber where you only hear what you want to hear. And I'm glad that exists here, and I don't want to see ANYONE'S voice silenced. We all benefit from the free exchange of ideas.

If you don't like what someone has to share, or feel their opinion isn't valuable to you, then ignore it and move on. But don't assume that it isn't valuable to someone else. And don't assume everyone on BH is a savvy investor who already understands the risks and tradeoffs. I wasn't, and I'll assume :wink: I'm not the only one to find BF before they were financially literate.
bling
Posts: 761
Joined: Sat Jan 21, 2012 12:49 pm

Re: If you have a sizable portfolio, you don't need an emergency fund

Post by bling »

SnowBog wrote: Sun Oct 25, 2020 12:27 pm
bling wrote: Sun Oct 25, 2020 8:03 am
SnowBog wrote: Sat Oct 24, 2020 11:21 pm Personal finance is personal, no argument there.

But ultimately, I welcome someone like KlangFool who has a clear interest in trying to help others, shares their personal story giving context to their views, and invests the time to explain things when asked. In my view, that's not a bad thing...

As I understand it, way too many people live paycheck to paycheck, and assume the next one will always come...

New investors who argue for 100/0 rarely understand how "they'll" react when they see their balances crater.

And I forget the exact quote (and who said it), but it was eye opening for me to hear the biggest risk to most investors is themselves (and the irrational decisions they may make).

So I have no problems with people providing a "cautionary tale" to highlight life doesn't also work out according to "your plan". For those that already know this, they can ignore it. For those that don't, I'd rather they hear it now before they suffer from not having known. Isn't that the point?

But as you noted, personal finance is personal, people are ultimately responsible for making their own choices...
the typical BH does not live paycheck to paycheck. they save at least 20% of their income. many save 50% here. with that rate of contribution, it doesn't matter if you're 100% stocks, 100% bonds, EF, or no EF, you will be fine.

i personally don't believe in emergency funds, and i have not had one ever. if you want to sleep well at night increase your bond allocation.
Long time BH, sure - but there are lots of new members where that simply doesn't apply.

I'll use myself as an example. Before I found BH and started to get a handle on finances...

I've maxed out my 401k for nearly as long as I've had access to one, but our income vastly surpassed my 401k contributions, and we never thought to start my spouses tax-deferred contributions, so I was likely saving far less than 10% of my income.

I was 100% stocks. Not by choice, but by ignorance. I just selected the fund options with the best reviews. And we had an obscene amount of concentration in employer stocks...

I didn't know about Backdoor Roths, Mega Backdoor Roth, the role of bonds, SWR, retirement planning, or many other topics.

I had no real emergency fund/plan/strategy. I did have a decent savings account, so I wasn't quite "paycheck to paycheck". But often times our spending was out of control, so there were several times I had to drain our savings to cover expenses. Had we had a "real emergency", especially if that was tied to me being unemployed, it could have been very bad for us...

I credit this wonderful community for taking me from a financial idiot to (hopefully at least) financially literate. I appreciate the "old guard" like KlangFool, who provide an historical and personal perspective I can learn from. And I appreciate the "new ideas" of people looking to push the envelope and come up with new approaches. I think the balance of both provides something far better than an echo chamber where you only hear what you want to hear. And I'm glad that exists here, and I don't want to see ANYONE'S voice silenced. We all benefit from the free exchange of ideas.

If you don't like what someone has to share, or feel their opinion isn't valuable to you, then ignore it and move on. But don't assume that it isn't valuable to someone else. And don't assume everyone on BH is a savvy investor who already understands the risks and tradeoffs. I wasn't, and I'll assume :wink: I'm not the only one to find BF before they were financially literate.
that kind of reinforces my point. controlling your spending is what put you on the path to success, not the existence of an emergency fund.

if anything, given how long this thread is it's quite evident that nobody is being silenced and that opposing opinions are being presented from all sides. readers can pick and choose what they believe in. this is not the first emergency fund thread, and it will not be the last.
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willthrill81
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by willthrill81 »

bling wrote: Sun Oct 25, 2020 1:02 pm that kind of reinforces my point. controlling your spending is what put you on the path to success, not the existence of an emergency fund.
Come to think of it, I cannot recall ever hearing someone say 'We had a diversified investment portfolio but no emergency fund, and boy did that create major problems for us.'
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by SteadyOne »

It is all mental accounting, but nevertheless:

Emergency fund is a liquid investment that will cover 6 or 12 months of living expenses. Cash or so.

Investment portfolio is a mix of investments with established proportions of each for long term goal, mostly retirement, which is is rebalanced periodically to keep proper assets allocation.

If you consider emergency fund a liquid part of your investment portfolio then it is not emergency fund anymore.

Because say in a downmarket you lose your job and need to eat through your emergency find. However if your emergency moneys come from your investment portfolio you can no longer rebalance in a right way cause you already spent your cash on daily expenses. And the beauty of buying in downturn market is because it is cheaper.
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SnowBog
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by SnowBog »

willthrill81 wrote: Sun Oct 25, 2020 1:17 pm
bling wrote: Sun Oct 25, 2020 1:02 pm that kind of reinforces my point. controlling your spending is what put you on the path to success, not the existence of an emergency fund.
Come to think of it, I cannot recall ever hearing someone say 'We had a diversified investment portfolio but no emergency fund, and boy did that create major problems for us.'
Great point!

But I've also seen several posts from people who sold everything and went to cash. Some have been there for years...

I can only wonder if they had an emergency fund and/or a more conservative AA if they'd have been able to "stay the course"...
SteadyOne wrote: Sun Oct 25, 2020 1:31 pm It is all mental accounting, but nevertheless:
And I think that's the point some are making. For many, it's more behavioral than math. Just because mathematically a particular approach is optimal, doesn't mean it's the right approach for everyone. Some may lack the temperament...

As was previously noted, personal finance is personal...
rockstar
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by rockstar »

bling wrote: Sun Oct 25, 2020 9:48 am
kimura king wrote: Sun Oct 25, 2020 9:00 am
rockstar wrote: Thu Oct 22, 2020 10:56 pm I keep my emergency funds in my checking account. I don't have to sell investments to raise cash. This has kept me panic free. It's really about behavior more than anything else. My taxable account is large enough to more than pay off my home.
this is what winning looks like
at the low low price of 6-7% expected CAGR every year.

more power to you if you need something like this to stay the course but let's not ignore the real costs of doing so.
The market doesn't work that way. It's not a constant annual increase. It's some steep years, some not so steep years, and some negative years. You have to no clue what market you'll be drawing your cash from during an emergency. Also, the market can be very volatile within a year. Let's say you had got laid off in March when the market crashed. Oh, boy, you now need to withdraw your emergency funds while it's tanking. Of course, if you look back at this year as a whole, it will look pretty good. We'll most likely end up in the green over 6% at year end.
Last edited by rockstar on Sun Oct 25, 2020 2:57 pm, edited 1 time in total.
nigel_ht
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by nigel_ht »

It’s an interesting topic with multiple “correct” answers and nuance...enough that we had at least 3 related threads recently: this one about EF, the dry powder one, and the 100% stock portfolio one.

My take is that there are commonalities with military doctrine and principles...and EFs are like tactical reserves.

What’s interesting is two most common military principles across various militaries involve mass/concentration and economy of force.

You want concentration at the key point in battle to overwhelm your opponent rather than spread your forces evenly everywhere. Makes sense.

We think the same way with finances...a 1% allocation to something isn’t going to make much difference. Even going to 100/0 from 90/10 really doesn’t move the needle much in terms of returns...or risk. Going to 100/0 from 60/40 moves the needle.

Getting as close to 100/0 as we can manage/tolerate let’s us achieve mass that results in more absolute dollars gained to reach our FI goal. Especially with bonds returning what they are.

Economy of force is just employ all your combat force as effectively as possible. Maximize the amount of folks actually trying to win. Folks just sitting there is not so good.

For finance that’s essentially trying to maximize the amount of money making a return. Cash just sitting around isn’t doing anything to grow your net worth. So again, getting as close to 100/0 is good.

Now these two principles imply that troops sitting around as your reserve isn’t really doing much to help you win and yet retaining a reserve is believed to be a responsible application of combat power. Keeping a reserve is taught because “Bad Things Happened To Commanders That Didn’t Keep A Reserve”.

Like with everything else when you look at the historical data the answer is “it depends”. You can find plenty of examples where reserves were the critical element for victory, made no difference at all or caused the loss of the battle.

Cannae was lost because Varro didn’t keep a reserve. He massed his troops to crush Hannibals center...adhering to the two principles of war above.

Caanae was won because Hannibal didn’t keep a reserve. He massed troops on his wings and when the Romans pushed back the center he was able to flank Varro. Varro, with no reserves, couldn’t do a whole lot to counter and got spanked.

Waterloo is an example where both Napoleon and Wellington had reserves and they didn’t really change the outcome of the battle. Moreover Wellington redeployed troops from his left flank to the center...troops that already had been allocated and not held in reserve.

For us, that’s like selling stock to cover emergencies.

tl;dr - Reserves (aka EF) are situationally very useful but often don’t do a whole lot even for masters of the art.

If you keep one it behooves you to put some thought into when you are willing to use it beyond “I lost my job in the middle of a global financial disaster and a hurricane flooded my house”. Because otherwise it’s just sitting there never doing much for you. Over time that can cost you tens or even hundreds of thousands of dollars.

If you don’t keep one it behooves you to think about how and how quickly you can disentangle other assets to cover the shortfall...and maybe practice that once or twice to make sure you know what needs to happen...because it’s probably non-trivial and you’re gonna be real stressed at the time.

Either way, you should decide based on your current situation and not just because it’s Boglehead doctrine.
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by Broken Man 1999 »

willthrill81 wrote: Sun Oct 25, 2020 1:17 pm
bling wrote: Sun Oct 25, 2020 1:02 pm that kind of reinforces my point. controlling your spending is what put you on the path to success, not the existence of an emergency fund.
Come to think of it, I cannot recall ever hearing someone say 'We had a diversified investment portfolio but no emergency fund, and boy did that create major problems for us.'
That has been our situation for a very long time. We have never had an emergency fund, even when we were starting out. We were a two-income couple before and after DW exited the work force to have children, then returned when the children started preschool. Now our portfolio supports us with a low percentage of TIRAs distributions, whatever we need beyond our SS benefits.

There are large differences in financial assets, job security, family expenses here at BHs.

Bottom line, there are no right/wrong answers, the BHs are not a homogenous group at all. Each person/couple must build their own plans considering their particular needs and comfort levels desired.

The ideas expressed here may or may not be useful for others. The suggestions are simply what/how others address THEIR needs. Sometimes there are ideas that may be applicable for others to emulate, sometimes not.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by AerialWombat »

bling wrote: Sun Oct 25, 2020 9:48 am
kimura king wrote: Sun Oct 25, 2020 9:00 am
rockstar wrote: Thu Oct 22, 2020 10:56 pm I keep my emergency funds in my checking account. I don't have to sell investments to raise cash. This has kept me panic free. It's really about behavior more than anything else. My taxable account is large enough to more than pay off my home.
this is what winning looks like
at the low low price of 6-7% expected CAGR every year.

more power to you if you need something like this to stay the course but let's not ignore the real costs of doing so.
I would like to think that most of us that hold large cash emergency funds are well aware of the opportunity costs. It is exactly the same regarding my awareness of the opportunity cost of my 30/70 AA.

But despite that, we care not. I am happy holding a sub-optimal portfolio, from a backtesting perspective, if it prevents me from panic selling everything on a day the S&P500 slides a measly 4%....because I’ve behaved that way before.

Investor: Know thineself.
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by SnowBog »

nigel_ht wrote: Sun Oct 25, 2020 1:55 pm It’s an interesting topic with multiple “correct” answers and nuance....

[...]

Either way, you should decide based on your current situation and not just because it’s Boglehead doctrine.
Which is why this is a discussion board so people can hear differing opinions, apply them to themselves and their situation, and hopefully make better choices than "winging it".
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by fingoals »

000 wrote: Sat Oct 24, 2020 6:24 pm
fingoals wrote: Sat Oct 24, 2020 6:23 pm Thank you for chiming in. I think that two comments by @ivgrivchuck above answer my question pretty well and hope that you agree.
Yes, I was just clarifying why I chose Short Term Treasury Index for the comparison.
I see. Thank you, again.
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by bling »

rockstar wrote: Sun Oct 25, 2020 1:54 pm
bling wrote: Sun Oct 25, 2020 9:48 am
kimura king wrote: Sun Oct 25, 2020 9:00 am
rockstar wrote: Thu Oct 22, 2020 10:56 pm I keep my emergency funds in my checking account. I don't have to sell investments to raise cash. This has kept me panic free. It's really about behavior more than anything else. My taxable account is large enough to more than pay off my home.
this is what winning looks like
at the low low price of 6-7% expected CAGR every year.

more power to you if you need something like this to stay the course but let's not ignore the real costs of doing so.
The market doesn't work that way. It's not a constant annual increase. It's some steep years, some not so steep years, and some negative years. You have to no clue what market you'll be drawing your cash for an emergency. Also, the market can be very volatile within a year. Let's say you had got laid off in March when the market crashed. Oh, boy, you now need to withdraw your emergency funds while it's tanking. Of course, if you look back at this year as a whole, it will look pretty good. We'll most likely end up in the green over 6% at year end.
that's why i said expected. nothing is guaranteed. but it's a mathematical fact that the opportunity cost is real.

people often bring up the example of needing to withdraw funds at inconvenient times. there isn't a single proponent of the no-EF group that doesn't understand that. they accept the (very low) probability that they may need to sell stocks at inconvenient times. in practice, this is not a big a problem as it seems. that's because as stocks fall, the flight to safety keeps bond prices high. that means to maintain your AA you would actually sell your bonds, not your stocks, ensuring that all your existing shares in stocks have an opportunity to recover.

but as others have already mentioned, this is all mental accounting. there's no practical difference between a 80/20 portfolio with an EF fund vs someone with a 75/25 portfolio with no-EF. (pick & choose your split, willingness/need/ability etc etc etc)
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Re: If you have a sizable portfolio, you don't need an emergency fund

Post by absolute zero »

bling wrote: Sun Oct 25, 2020 2:48 pm but as others have already mentioned, this is all mental accounting. there's no practical difference between a 80/20 portfolio with an EF fund vs someone with a 75/25 portfolio with no-EF.
This is true. Despite this, if two people held the AA's that you describe above then they would spend hours arguing about whether or not an EF is needed. Some people don't seem to get it. The pros/cons of an emergency fund are somewhat meaningless without the context of the rest of an investor's portfolio.
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